AOTM-Producer-Whitepaper-FINAL

Project Team: - Nellie McAdams, Consultant, Author - Amanda Oborne, VP, Food & Farms Program, Ecotrust - Stacey Sobell, Director, Food & Farms Program, Ecotrust - Katy Pelissier, Program

ORGANIZING TO REBUILD AGRICULTURE OF THE MIDDLE:

A needs assessment of Agriculture of the Middle (AOTM)

producers supplying Oregon’s foodshed

Prepared by Nellie McAdamsEcotrust | November 2015

Table of Contents

Acknowledgments 1

Executive Summary 2

Purpose and Foundation 5

Project Background 5

Working Hypothesis 5

Guiding Questions 6

Methodology 6

Working Definition of Agriculture of the Middle (AOTM) .7

Issue Areas 11

Business Structure and Succession 11

Growing Practices 15

Operations Management 20

Sales and Marketing 23

Land Based Issues 29

Financial Issues 34

Recommendations 42

Recommendations for Ecotrust 42

Producer Thoughts on the Redd 43

Recommendations for Ecotrust Working with Partners 46

Recommendations for Partner Work to Support .47

Conclusion 49

Potential Next Steps 55

Bibliography 56

Glossary of Acronyms 57

Appendices 58

Summary of USDA Data on AOTM Producers 58

Interview Questions 65

This whitepaper was made possible by the generous support of the Nell Newman Foundation

Project Team:

- Nellie McAdams, Consultant, Author

- Amanda Oborne, VP, Food & Farms Program, Ecotrust

- Stacey Sobell, Director, Food & Farms Program, Ecotrust

- Katy Pelissier, Program Manager, Food & Farms Program, Ecotrust

- Nathan Kadish, Director of Investment Strategy, Ecotrust

This whitepaper was informed by input from the following experts:

- John Baker, Attorney at Law and Administrator,

Iowa Beginning Farmer Center

- Michael Baker, Farm Transition Specialist,

Iowa Beginning Farmer Center

- Noah Brockman, Small- and Medium-Sized Enterprise Business

Management Consultant, Advisor, and Project Manager, Oregon Small Business Development Center Network

- Justin Freeman, General Manager, Hummingbird Wholesale

- Lauren Gwin, Associate Director, Oregon State University Center

for Small Farms and Community Food Systems

- Eric Henny, Relationship Manager, Northwest Farm Credit Services

- Jim Johnson, Land Use & Water Planning Coordinator,

Oregon Department of Agriculture

- David McAdams, Estate Attorney, Cable Huston LLP;

Hazelnut farmer in Gaston

- Tanya Murray, Organic Education Specialist, Oregon Tilth

- Sherri Noxel, Director, Austin Family Business Program,

Oregon State University’s College of Business

- Holly Rippon-Butler, Land Access Program Director,

National Young Farmers’ Coalition

- Kathy Ruhf, Senior Program Director and Massachusetts &

Rhode Island Field Agent, Land For Good

- Jenny Rushlow, Staff Attorney and Director of Farm & Food Initiative,

Conservation Law Foundation

This whitepaper could not have been completed without the thoughtful participation

of our eighteen producer interviewees Their contribution of time to this effort was especially appreciated given that the interviews were conducted during the busiest time of year for these businesses

For the purpose of confidentiality, these producers and their businesses are not named in this document

Executive Summary

Lay of the Land

Regional wholesale is one of the most efficient means of supplying Oregon’s

foodshed with local agricultural products Yet, not only do existing processors and distributors lack the capacity to meet local demand, but many Oregon producers lack resources to grow to a scale where they can supply this demand

Summary of Need

We believe that in order to increase regional resilience, our food system should rely more heavily on a distributed network of socially responsible, family-scale farmers, ranchers, and processors In opposition to current trends towards increasing consolidation and industrialization, these mid-scale producers would help diversify food production, providing the redundancy and geographic diversity to increase resilience

Project Background

The purpose of this whitepaper is to inform Ecotrust’s Food and Farms Program

on the needs of Agriculture Of The Middle (AOTM) producers supplying Oregon Ecotrust identified the needs of Oregon’s processors and distributors in their Oregon Food Infrastructure Gap Analysis,1 in June, 2015 Both of these reports will inform Ecotrust’s strategic plan to help increase the supply of local food to Oregon’s

foodshed

General Findings by Topic

Business Structure & Succession

• Pre-AOTM producers tend to do their own books to reduce costs, but a tipping point comes when some degree of impartial, expert financial oversight seems essential to the business’s expansion and viability

• Producers were interested in collaboration, either through formal cooperatives

or shared equipment and services, but few had organized a critical mass of producers in their locality with similar interests Some collaborated by growing crops for each other, and one producer was building a full-service cooperative

• Many AOTM producers are searching for qualified and dedicated successors

or, alternatively, ways to create cooperative “farmilies” that will carry on the operation Producers with the strongest succession plans not only deeded the operation’s assets to the next generation, but also trained them and gave them increasing management roles and responsibilities under the older generation’s supervision

• Producers agreed that working on a profit-driven farm was the best way learn

to farm, but many viewed training unskilled employees as a cost they could not afford Many producers were interested in business and financing courses, but

1 Oborne, Amanda, Mike Mertens, and Matthew Buck Oregon Food Infrastructure Gap Analysis Portland, Oregon: Ecotrust, funded by Meyer Memorial Trust, 2015.

did not have the time to attend They wanted one-on-one guidance from experts and peers, and valued farmer-focused conferences with unscheduled time for networking.

Growing Practices

• All producers, certified organic or not, used practices they considered

“sustainable,” which they would use regardless of certification They, therefore, became certified organic only when that brand increased their profit margin, such as when wholesale customers demanded it, when the demand and premium for organic was significant (e.g hay), or when organic techniques did not differ much from conventional (e.g alfalfa) Producers are less likely to certify when the cost of transition is compounded because numerous steps of production require certification (e.g poultry or value-added), or when the grower is

knowledgeable about commodity markets and has the volume to sell to them (e.g big grain)

• Producers suffered profit losses during the three years of transition from

conventional to organic and appreciated financial assistance during transition Diversified producers in particular felt burdened by the time and cost of organic inspection, but many felt that record keeping made them “better farmers.”

• Producers extend their season primarily through crop and market selection or double cropping rather than infrastructure e.g hothouses “Season” extension depends on what one’s direct competitors grow

• Many producers are making changes in anticipation of new food safety rules, e.g water purification and well-drilling But many will not GAP certify or make major changes until required to do so They fear new rules will prevent small operators from getting started and price out many mid-scale operators

Operations Management

Producers stated that, with labor, “you get what you pay for;” producers who pay above minimum wage and offer benefits do not have great difficulty finding and retaining quality employees Mechanization reduces labor, but is a big up-front cost and is contrary to some producers’ social or community values

Sales & Marketing

• Not having a marketing plan was one producer’s “greatest non-cost cost.” In general, the more that the producer was personally responsible for all farm finances (e.g not just a manager or sharing responsibilities with another farm), the more likely that they had a comprehensive business and marketing plan

• If there are few competitors in a producer’s niche, there is less of an incentive for them to diversify

• AOTM producers feel competition from small farms that do not necessarily comply with rules, national operations that poach niches that they trailblazed, and California farms flooding the market in season

• “Getting it to the customer is money,” including paperwork, fuel, and

infrastructure for distribution The cost per unit for distribution increases as the amount of product decreases Producers are interested in co-distribution, but reluctant to plan and pay for it

Land-Based Issues

• Many producers found their properties through luck, family, and community But expansion is not necessarily a good idea if the operation’s business plan does not account for additional expenses

• Most producers did not understand working lands easements or had only had temporary easements Some producers felt “forever was too long” and did not want to limit their or their successors’ options

• Most producers built or converted infrastructure as they grew They stated that

“profit on a small scale requires mechanization” and “specialized infrastructure pays for itself.” Yet producers need up-front capital to afford new infrastructure and they find it difficult to finance used or modified equipment

• Water rights often comprise the bulk of the land lease or purchase price Many producers are switching from surface to groundwater because of cost, food safety, and conservation

Financial Issues

• Labor was every producer’s primary cost, followed by fertilizer, chemicals, land, equipment purchases and repairs, and fuel Seed and animal feed prices were increasing, due in part to seller consolidation

• No primary AOTM producers had second jobs aside from minor side ventures This seemed essential

• Most producers bought their land and infrastructure piece-by-piece with cash; they preferred having as little debt as possible and “growing at an appropriate rate.” They live frugally to be able to reinvest

• The most difficult lending criteria to prove was a track record, or the ability

to repay This is in part due to agriculture’s inherent volatility - the “ups and downs” of agricultural costs, prices, and crop yields

Primary Conclusion

Small producers must make multiple “quantum leaps” to become AOTM; in other words, to be profitable, they must often expand their land base, infrastructure, labor force, and/or market before all the elements of their business can accommodate expansion, or before they have the ability to capitalize growth Self-financing slows the rate of growth, but a measured pace of growth might be wise for longterm

viability

Recommendations

Recommendations are organized according to whether they could be led by Ecotrust, partners, or both They include: 1) matchmaking between producers and investors, purchasers and processors, 2) protecting farmland and making it accessible to

beginning producers, 3) providing access to expert and peer assistance for marketing, business planning, and succession planning, 4) supporting beginning farmer and specialized labor training opportunities, 5) financing programs that target difficult growth stages for producers, and 6) policy and research to help accomplish these goals

Purpose and Foundation

Project Background

The goal of Ecotrust’s Food and Farms Program is to build resilience in Oregon’s food system To help accomplish this goal, this program cultivates connections between Oregon’s agricultural producers and wholesale purchasers

The purpose of this whitepaper is to inform Ecotrust’s Food and Farms Program

on the needs of Agriculture of the Middle (AOTM) producers in Oregon Ecotrust described opportunities for improving infrastructure and connectivity within

Oregon’s agricultural processing and food distribution system in their Oregon Food Infrastructure Gap Analysis,2 released in June, 2015 Program staff will use the information and findings in both of these reports to craft a strategic plan to rebuild AOTM in Oregon

2 access to land, and

3 business management expertise and support This category includes, but is not limited to, market development, insurance, compliance with wholesale requirements, and compliance with regulations (including food safety regulations).

2 Oborne, Oregon Food Infrastructure Gap Analysis, 2015.

In the course of this research, we modified the first point slightly to read

“understanding when and how to capitalize expansion.” This refinement is intended

to reflect that, while many financing tools are available, a prerequisite to financing should be a well thought-out financial and business strategy A producer may

explore financing options that support their strategy, but understanding how

to wisely grow and prosper is as important as understanding how to finance or capitalize any identified needs

Guiding Questions

Our initial guiding questions were:

1 Why, when, and how do AOTM producers grow to this scale?

2 Do AOTM farmers, in fact, hold themselves to higher environmental, animal welfare, and labor standards? If so, why, and if not, why not?

3 Why do AOTM producers choose to not “get big” or sell nationally

3 Is there truly a lack of local supply to meet regional demand?

The initial guiding questions and the first two additional questions are addressed

in the conclusion of this report The final supplemental question is explored in Ecotrust’s Oregon Food Infrastructure Gap Analysis for six product categories All questions could be explored in greater detail

Methodology

In choosing producers to interview, we first identified criteria that were relevant

to our definition of AOTM (see “Working Definition of Agriculture of the Middle (AOTM)” below) These criteria included:

• Business Scale, including gross income, the number of employees, the proportion

of wholesale sales, the types of wholesale accounts, and other marketing outlets,

• Land, including location, whether land was leased or owned, the types of

products produced, and whether the operation was certified organic, etc or considered its practices to be “sustainable,” and

• Succession, including whether the business was family-owned, had a succession

plan, or had a working lands conservation easement

The research team measured a number of potential interviewees against these criteria and selected twenty producers who were either AOTM, slightly larger than AOTM, or about to become AOTM, who represented the greatest diversity among these criteria Key points of diversity included: estimated gross, proportion of wholesale sales, product category(ies), and location.

We considered producers who were either known to us, referred to us by colleagues

or AOTM wholesalers, or found through internet searches of their product category

In all, we interviewed eighteen producers in ten different product categories with between five and 3,500 acres in production, between two and forty employees during high season, and between under $50,000 and $15 million in gross sales

In-person interviews were preferred over phone interviews to improve the quality and detail of the exchange of information To accomplish this, we took three major trips during July, 2015 and traveled over 2,400 miles, spanning from Walla Walla, Washington to Nehalem and Grants Pass, Oregon

Interview questions were developed through team collaboration with advice from partners These questions encompassed five basic topic areas: 1) business structure and succession, 2) growing practices, 3) operations management, 4) land-based issues, and 5) financial issues (see Appendix B: Interview Questions) For the purpose

of this report, Sales and Marketing was separated from Operations Management into its own category to form six total categories

Despite our efforts to seek a diversity of producer categories and experiences, we recognize that eighteen producers is a small sample set We acknowledge that

the producers we have chosen cannot speak for all AOTM producers, or even

the average AOTM producer, if there is one As a result, this whitepaper often

attributes statements and observations to individual producers, whose names are kept confidential, or to categories of producers, rather than to AOTM as a whole Generalizations are made where strong correlations were observed

Working Definition of Agriculture of the Middle (AOTM)

Disclaimer

For the purpose of identifying Agriculture of the Middle (AOTM) producers to

interview for this whitepaper, and to help define this demographic for Ecotrust’s continuing food systems work, we created the working definition of AOTM producers outlined below The definition is formatted as a set of characteristics shared by most, but not all, AOTM producers, rather than as a concise and absolute description We found this to be the most usable and accurate approach, given the following inherent difficulties of defining AOTM

First, there is no hard and fast rule distinguishing AOTM producers from their larger

or smaller counterparts AOTM producers are neither large, corporate-controlled, commodity operations, nor small, highly diversified, direct market operations, and

yet they might have characteristics of both of these two extremes For example, an AOTM producer might be indistinguishable from a small-scale producer of the same product in terms of acreage in production, but have greater net proceeds and be able

to sell to regional wholesale markets because of its location or investments in labor, equipment, and professional business management Moreover, the size-to-profit ratio varies dramatically between product categories, such that an AOTM vegetable seed farmer on 10 acres might net more than a dry land grain farmer on 1,000 acres

As the Ag of the Middle resource hub explains, “the definition of AOTM farms and ranches is scale related but not scale determined … [and] varies with crops produced, geography and market.”3

Second, it is difficult to isolate information on AOTM producers using existing data For example, AOTM producers generally sell more than one product through more than one marketing channel, yet USDA Census data rarely aggregates data from individual products or marketing channels and attributes it to the individual diversified producers from which it came

Because of the above difficulties in creating a commonly accepted, objective

definition of AOTM, our working definition by necessity has a subjective foundation

We began crafting this definition by identifying the one characteristic of AOTM producers that is most relevant to our work: selling to wholesale markets with regional distribution From there, we identified the following common causal

conditions and attendant circumstances for producers who have grown to be this large: 1) average gross, 2) supporting a family on their farm income, 3) employing farm laborers, and 4) having some but not a lot of diversification We also identified the following factors which might prevent these businesses from becoming very large: 1) owner-managed and -operated, 2) engaged in cooperative marketing and processing agreements, and 3) a commitment to community and environmental values

The definition is admittedly somewhat circular, or proven by itself, since it is

premised in part on our observations of producers whom we chose as prime

examples of the model of production we hoped to study It is, therefore, quite

possible that the average Oregon producer who fits the quantitative factors of our definition (e.g gross) might not exhibit all of the qualitative (especially values-based) factors of our definition to the extent that our observations indicated In addition, the sample set for this project was too small (eighteen) to address the definition’s intrinsic bias by interviewing a larger number of producers

However, although there is some unavoidable bias in the selection of our sample set and the creation of our definition, our research showed a strong correlation, or at least a marked co-existence, of the definition’s factors (quantitative and qualitative) among the producers we interviewed

3 Kirschenmann, Fred, Convening Chair “Characterizing Ag of the Middle and Values-Based Food Supply Chains.” Agriculture of the Middle January 2012 September 21, 2015 http://www.agofthemiddle.org/ archives/2012/01/characterizing.html

Definition of AOTM

Although it might be impossible to craft a definition that describes all and only AOTM producers, it is safe to say that AOTM producers tend to share a common scale

of operations and a value system which meet most of the characteristics listed below:

In regards to scale of operations, AOTM producers tend to:

• be owner-managed and -operated;

• gross between $100,000 and $3,000,000;

• support the owner-operator’s family on the net profits of the agricultural

operation, whether or not the owner(s) also choose to receive off-farm income;

• have farm laborers;

• produce more than one product, but are not extremely diverse;

• sell a significant portion of their product to wholesale markets The wholesale markets to which they sell tend to be primarily restaurants, institutions, retailers, and small regional processors and distributors, rather than large commodity brokers; and

• be more engaged in sharing marketing and administrative costs with other similar producers, such as through cooperatives or aggregators

In regards to values, AOTM producers tend to:

• contribute to local economies by hiring and purchasing locally;

• compensate their workforce as best they can;

• be actively involved in their community;

• use agricultural practices that are conscientious of animal welfare;

• exhibit a high level of environmental stewardship (certified or uncertified) in their production practices and the treatment of their unfarmed land;

• make efforts to be environmentally resilient and financially competitive in light

of climate change;

• be interested in delivering their products to consumers within their state’s

foodshed This is in contrast to selling products primarily to national and

international markets or just within their small locality; and

• make decisions for their operation based on costs and benefits projected beyond the current operator’s generation This long term decision-making affects both environmental stewardship and relationship building with other producers, members of the supply chain and, (sometimes) farm successors

The following observations, made during our research, helped shape our definition

1) Gross

We increased the range of gross for AOTM producers from between $50,000 and

$500,000 to between $100,000 and $3,000,000 $50,000 to $500,000 was chosen initially because the Agriculture of the Middle online resource4 identified this as their range However, upon reviewing USDA 2012 Agricultural Census data, this range appeared low for our purposes The first USDA gross income category where the majority of producers showed an average net income greater than two times

4 Ibid.

the 2015 federal poverty level ($48,500)5, was $250,000-$499,999.6 These producers reported on average $80,931 in net income to the operation and $79,848 in net income to the operator.7 The breaking point for twice the federal poverty level must fall between this category and the category of operators with sales between $100,000 and $249,999, which shows a net income of $28,540 to the operation and $25,773 to the operator.

However, producers grossing only $100,000 might also have many AOTM

characteristics, such as selling to regional wholesale markets These smaller producers might earn a higher net return from their lower-than-average AOTM gross because

of their superior efficiencies, windfalls of equipment, land, and infrastructure, or higher-margin crops and marketing niches Producers we interviewed who grossed less than $100,000 did not have either the regional wholesale markets nor net income

to be considered AOTM, but one operation is preparing to increase its efficiency and wholesale reach (and social impact) through a growers’ cooperative where many farms behave in the aggregate as one AOTM producer

Many producers in higher income brackets also exhibited most AOTM characteristics According to the USDA Census, the average farmer grossing $250,000-$499,999 nets around $80,000, but Eric Henny of NW Farm Credit Service stated that $115,000 net per family is a living farm income, implying that AOTM producers may be found in a higher concentration at higher gross sales categories

It was difficult to determine the upper limit of gross for AOTM producers, but our interviews led us to set $3 million as an approximate ceiling Of the producers who grossed $1.5 million, two had strong direct market as well as wholesale sales and one was solidly AOTM, selling only wholesale with an effort to sell to regional channels One producer who grossed $3-5 million and another who grossed $2.5 million and both considered themselves to be (and meet many characteristics of) AOTM producers These families have full control over their business, the farms are diversified, they make great efforts to be environmentally and socially sustainable, and although much of their product currently leaves the region, they are very

interested in regional wholesale, with one producer expanding their regional markets through a related processing enterprise At the extreme, the producer who grossed

$15 million had some features of AOTM, but because of their lack of diversification and targeted regional distribution, and the sheer size of their operation, they do not fit our definition of AOTM for the purpose of this work

For our purposes, it is, therefore, assumed that most AOTM producers gross between

$100,000 and $3 million The first range in gross sales where more than half of farms might possibly be considered AOTM is between $250,000-$499,999 However, the producers we interviewed who grossed $1.5 million also met almost all of of the characteristics of AOTM The percentage of AOTM farmers might taper off after $1.5 million in gross, judging from the several producers we interviewed who grossed roughly $3 million These producers did not align as strongly with our AOTM criteria

5 Federal Poverty Level September 26, 2015 http://obamacarefacts.com/federal-poverty-level/

6 National Agricultural Statistics Service (NASS) United States Department of Agriculture (USDA) August

8, 2015 http://www.nass.usda.gov/Statistics_by_Subject/index.php

7 Ibid.

in that they sold a smaller percentage of their total product into regional wholesale, despite an interest in increasing regional sales A larger sample set and further statistical research set would be necessary to develop definite brackets of AOTM scale

in terms of operational gross

2) Labor

Also under the scale category we added the criterion that AOTM producers generally retain farm laborers as either full- or part-time employees or contractors This point became obvious during our interviews, where only one (who was not quite AOTM scale) did not yet have a regular employee However, this producer raised a low input crop (hay) and had a relatively mechanized operation, and even this producer hired one part-time laborer during the high season

3) Climate Change

Finally, under the values category, we added the criterion that AOTM producers tend

to make decisions to mitigate the environmental and economic effects of climate change The importance of this criterion was anecdotal, but expressed spontaneously

by enough producers that it seemed relevant to the definition, especially as it relates

to how and why producers espouse sustainable practices

Issue Areas

Business Structure & Succession

Bookkeeping and Taxes

Until they become large AOTM, many producers or their spouses do their own

bookkeeping, although some admit to being “really bad at it” and that they “don’t know if it’s wise.” Producers are often self-trained in bookkeeping by webinars

or from prior employment Yet farm operations are different from and often more vulnerable to market and environmental risk than most businesses; there are many uncertainties in projecting farm profits One producer laughed that beginners think they can plan their farm finances on an Excel sheet: “Welcome to farming Nothing ever turns out like you think.” Even if they are competent, producers do not usually have time during the season to do their books with care

Since AOTM farmers are, by our definition, owner-operated and -managed, the time

at which the owner no longer has exclusive oversight over the finances might come later than would be ideal for business profitability Several producers felt that it was

a good business practice to have a second, impartial set of eyes looking over their financial decisions to “keep [the farm managers] in line,” especially if one of the partners is stealing profit Because of the complexity of farm accounting, not having

an expert bookkeeper or management team might hinder expansion For instance, one producer felt that doing their own bookkeeping, financial planning, marketing, and production supervision rather than cultivating a management team has been a limiting factor to the operation’s current and continuing success

In multi-generational operations, some next generation producers are not included

in business decisions One producer who farms with his parents, did not know the financials of his family’s operation He stated that he “knows so little about running

a proper business” and that the operation is “flying by the seat of [their] pants.” He felt that they were losing potential profits by not understanding or tracking their costs

of production By contrast, next generation producers who felt prepared to take over the business have been steadily entrusted by the prior generation with increasing management responsibilities This supports the view that succession planning is not merely the transference of assets, but also the transference of the skills and experience

to operate the business (see “Succession” below) Several producers hire a

part-time bookkeeper, and one “rents” their full-part-time bookkeeper to other farms AOTM producers might benefit from cost-sharing a business management team

Almost all producers interviewed hire an accountant to do their taxes, especially since,

as one producer stated, tax law is complex and there are “constant changes” that a lay-accountant cannot keep track of

Business Entities

Most businesses separated the farm business (as an LLC, S-Corp, or C-Corp) and sometimes homes and buildings (as an LLC) from the land (as a sole proprietorship or LLC) This helps prevent creditors or parties with a judgement (e.g food safety claim) against the farm business from claiming the farm real estate as part of the business’s assets This separation of entities saved one producer’s land during bankruptcy

Agricultural operations can use business entities for succession planning by gradually increasing new members’ ownership and voting rights For instance, one operation’s young partners currently have equal decision making power but less ownership than the founders; their ownership will increase over time

One producer did not know how their business was organized, or that by not

organizing they are a de facto sole proprietorship One smaller producer was a sole proprietorship, but wanted to become an LLC

Cooperatives and Cooperation

Several producers are engaged in or exploring options within and beyond the operative business structure, such as: 1) a creative succession model with shared ownership, 2) vertical integration where separate businesses are owned by different family members, 3) an interest in the shared purchasing and use of expensive

co-equipment like an optical sorter, 4) community-based processors that act “like a family operation” (e.g Lundberg Mill and Lochmead Dairy), and 5) one producer’s marketing co-operative with broad flexibility in how members may participate As a further example, more than 30% of Clackamas County farmers surveyed by the County expressed interest “in joining an association, cooperative or similar organization to

access equipment, resources and other inputs, lower costs and expand their market.”8

OFARM in California found that cooperatives were most successful if they built trust among producers and allowed for flexibility of producer participation.9

Their experience showed that cooperatives could magnify the market influence of individual niche (organic) producers to increase demand for and wholesale access

to their product, but that “deep-pocketed food corporations [soon] undermine

farmers’ connection to organic marketing organizations” by capitalizing on the marketing niche the cooperative created and poaching producers by out-competing the cooperative on prices.10 They also found it difficult to recruit members and accumulate profits within cooperative regulations, like the Capper-Volstead Act.11

Building a critical mass of producers within a feasible geographic region and with

a similar product can be a challenge for cooperative formation, especially in rural areas or for new or capital-intensive crops Yet one producer is trying to increase the number of neighboring organic producers of the same crops by informing them of organic price premiums, and one producer is working to convene and train the next generation of local farmers, who might then join the operation’s related marketing cooperative

One producer expressed frustration with the inefficient decision making within a cooperative, and several felt that not having personal control over the business’s resources prevents an “ownership mentality” that encourages producers to “pay attention to detail” and follow their costs and price negotiations closely

One consideration for larger cooperatives with decentralized processing is that farmers usually only have an incentive to join a cooperative’s board if they are large enough to have a stake that requires self-representation These larger producers might use their processing infrastructure to process product on a fee agreement with the cooperative However, producers at this scale might have the capacity to vertically integrate and sell their own product, making their long-term commitment

to the cooperative uncertain

so that the son can “learn by performance.” Several farms (all large) are organized such that the older generation supervises while the next generation operates the business A producer who is transferring the operation to two non-related producers,

is helping the young producers build equity by giving them one-third share each

8 Cogan Owens Cogan with MARStewart Group, LLC and Crossroads Resource Center, Eds “Clackamas County Agriculture and Foodshed Strategic Plan,” p 13 Oregon City: Clackamah County, 2012 http://www clackamas.us/business/documents/CC_Foodshed_Strategy_FINAL.pdf September 1, 2015.

9 Lyson, Thomas, G W Stevenson, and Rick Welsh, Eds Food and the Mid-Level Farm: Renewing an Agriculture of the Middle, p 65 Cambridge, Massachusetts: The MIT Press, 2008.

10 Ibid.

11 Ibid.

The older producer is a consultant, but the younger producers make the business decisions The older producer said, “if you want them to treat it like they own it, let them own it.” Similarly, one first-generation operation, is transferring ownership to unrelated farmers via an LLC Yet the transference of operation management depends

on interpersonal dynamics, including when and whether the older generation is willing to share information with and entrust responsibility to the next generation One producer had not received this information from their family and felt not only unprepared to manage the farm business, but unsure of the family’s intention to transfer it to them

For several larger and multi-generational farms, estate planning was done in

due course of business But many first-generation operations nearing transition have neither a succession plan nor identified successors - family members or

not Producers with children noted that, to be enticed, children need not only the guarantee that they will inherit the skills and experience to manage the operation, but also the expectation that the business will be profitable A producer gave Hood River as an example: when apple prices are good, the next generation comes back And even if farm children are interested, some might not make their decision within the timeline needed for proper succession planning

For producers whose children are not interested in the operation, it is difficult

to identify unrelated successors One producer has made numerous unsuccessful attempts to train young and eager, but irresponsible and grossly inexperienced, potential successors Another producer calls conventional neighboring farms with children who might be interested in organic production And yet another producer has been searching without success for farmers prepared to manage and afford his operation These producers innately desire to expand their operation, but are uncertain when and how to expand, given the uncertainty of future management

Operations that do not own their land (yet) and/or who do not have children,

either do not feel an urgent need to plan for succession, or are attempting to plan community-based succession with multiple, like-minded beginning producers As one producer said, “it’s a community effort And if we don’t have these big farm families anymore, we have to create farmilies.”

Several first-generation farms have not thought seriously about succession because they feel their track record is not predictable enough to estimate what they could pass on One of these producers regretted that the estate “would be a mess,” but has not planned for succession, in part because the producer does not believe that

a written succession plan would be properly executed after his death, or that it is possible to craft a document that could affect their wishes In a survey of Clackamas County producers, less than 39% had a succession plan, and only 43% of those with

a plan had this formalized in a legal document.”12

Producers who intended to inherit the operation emphasized that “there is no equity

in succession;” the retiring generation is never required to give farming and farming members equal asset value This principle is especially challenging when

non-12 Cogan Owens Cogan, 10.

transferring a farm business to non-family members For example, a producer

mentioned a farm family that had verbalized, but not recorded, an agreement to pass their operation on to unrelated farmers However, the producers’ children wanted to liquidate their share of the estate and did not honor the verbal agreement Some farm children were preparing to inherit the family business, but their siblings expected

an equal share of the assets, which would severely harm the viability of the farm business One producer stated that, “if you split up the land, you wreck it,” which is more than just a barrier to profit, “it destroys the family legacy when land has been

in the family for generations.”

Most producers preferred selling their land to successors who would continue their operation and sustainable management techniques But since land is their greatest asset, they must ultimately rely for their retirement on income from its sale, whether

to sustainable or conventional producers or to non-producers

Growing Practices

Sustainability

Impetus to Transition to Sustainable Certifications

All producers interviewed, certified and uncertified, took opportunity costs that may

or may not have been compensated through price premiums to institute “sustainable” practices And many certified organic producers said that they would use practices that meet or exceed the National Organic Program (NOP) even if they were not certified The decision to become certified under a program like the NOP seems

to be primarily related to whether the the price premium, minus the expense of certification and costs or lost profits of organic production, result in a significant net profit

Producers tend to certify when they begin to sell to a wholesaler with regional distribution, when there is a high premium for and limited availability of organic product (dairy, hay, or specialty grain), or when the product is relatively easy to grow organically (alfalfa) Producers seemed less likely to certify when the cost

of certification is compounded by numerous steps of production that each require certification (poultry or value added) or when the grower is comfortable selling their crop to commodity markets (big grain)

One conventional producer who was very conservative with chemical application did not see the long term financial benefit for the short term inconvenience of organic transition and paperwork, but would consider transition if a) “times were tough,” b)

as a result, they were forced to examine the cost benefits of organic transition, and c) those benefits were significantly greater than the costs

Having few organic producers in a niche can help or hinder an operation One

producer shares their organic prices with conventional neighbors in the hopes of increasing the critical mass of organic producers in the area, creating opportunities for shared processing But another producer benefits from being one of the few producers in their niche in the Pacific Northwest because customers pay for their certification

Reasons for not Certifying

Whether a farm seeks any certification seems to depend ultimately on pressure from the consumer, not just the purchaser In direct market grain, this is GMO-

Free certification; one grain producer said that their customers do not ask for

organic In wholesale, customers demand organic, but generally not GAP In fact, some fresh vegetable producers joined together to refuse a wholesaler’s request for GAP certification (see “Food Safety”) Their success might have been due in part

to the lack of public demand for and/or knowledge of GAP certification Federal requirements for food safety would, obviously, override an absence of direct

consumer demand Similarly, one biodynamic producer does not feel the need to certify biodynamic under the Demeter Program because customers who care know that the operation is biodynamic, and those who do not care would not be influenced

by this certification

Transition can be costly, with increased risk and no price premium for the first three years It is beneficial when farms can transition in partnership with purchasers who market their goods as transitional to compensate for lost farm profit, as

Hummingbird Wholesale has done Where producers alternate between crops and fallow on a biannual basis, they could meet the three year transition threshold if they simply do not grow a crop one year, perhaps receiving a subsidy for this year But temporarily losing a portion of yield without having a price premium to fill the revenue gap is not the only cost of transition A dairy producer said there is huge demand for organic dairy, but few existing dairy producers have the land base, infrastructure, or inclination to transition from a confinement dairy to organic, pastured production

Certifiers

One organic producer felt that it was worth paying extra money to certify under Oregon Tilth because of the organization’s reputation in the industry But another producer felt that Oregon Tilth has not proven to be the most thorough certifier, that their support services are insufficient and primarily for row crop growers, and that they are “really hands off until they want their fee.” One remote grower did not mind the lack of support services or oversight and appreciated that Oregon Tilth “left [them] alone.” However, several producers felt that organic certifiers “won’t boot someone who pays their dues,” even if they find spray residue, and that cheating was common in organic reporting Producers expressed skepticism about whether all product marketed as organic, especially international product, is actually grown according to NOP standards, and felt that conventionally grown food is often

marketed under the organic label

Paperwork

Some producers felt that the paperwork requirements of organic certification

were too time-consuming for them to satisfy, but many already had sophisticated record keeping systems or felt that maintaining records caused them to be “better farmers.” One organic producer documents “standard operating procedures” to avoid documenting each activity Less diversified and larger producers did not feel that certification was an unreasonable expense, especially since most certified farms received National Resource Conservation Service (NRCS) costshare But the cost and

time for inspection increases with the diversity of the farm, costing “thousands of dollars” and taking one full day for a diversified vegetable farm.

Difficulties of Organic Production

Some producers felt that some NOP requirements not only increased their cost of production, but could harm their soil For example, organic alternatives to chemical weed control are hand weeding (a huge labor cost) or frequent tilling (which harms soil structure and increases fossil fuel use) Organic grain and forage producers feel this pinch in particular, as organic regulations make it impossible to conserve the soil through no-till techniques in combination with minimal herbicide application Several organic farmers resorted to spraying non-OMRI-approved herbicides on parcels where they could not control their weeds with organic techniques; they lost their organic certification on these parcels for three years as a result

Non-organic growers who considered themselves sustainable, felt that the judicious use of more potent, targeted chemicals is sometimes better than many applications

of chemicals that are less toxic per application, but more toxic in the aggregate, and may even be more “sustainable” than some OMRI-approved chemicals and practices They felt that some pesticide regulations were flawed in that they did not account for a chemical’s overall toxicity, given the actual rate of use However, an organic producer noted that a major benefit of not spraying is that native pollinators flourish, benefiting crops like alfalfa seed

Many organic farmers worried about the accumulation of phosphorus and potassium

in their soil due to the application of the most affordable organic nitrogen fertilizer: chicken manure One organic producer also felt that the NOP’s rules limiting manure applications to fields and requiring the covering of compost heaps to prevent drift were contrary to sound soil and food safety science Most farmers, certified or not, used cover crop and never left bare ground in order to prevent erosion and improve soil health

One organic dairy producer agreed that the operation might save on costs by not using antibiotics or hormones, but that additionally, organic practices, such as pasturing animals and not feeding as much feed concentrate, reduce animal stress and improve animal welfare while also improving milk quality

Season Extension

The purpose of season extension is to increase profits by artificially creating a time-based market niche, but the demand and value for such a niche and what the producer grows in the early and late ‘shoulder’ seasons depends on what their direct competitors produce at that time For example, when one North Coast farmer competes with farmers in their region, season extension means producing hot

season crops, like corn, when competitors cannot But when that farmer sells to the James Beard Public Market or wholesale in competition with Willamette Valley or Californian growers, season extension means producing cool season crops suitable

to the North Coast, such as peas and brassicas, when competitors cannot In the first case, the farmer’s skill and infrastructure differentiate their product from growers

in their local growing and marketing region In the second, the farmer’s climate differentiates their product from more distant competitors with less favorable

growing conditions for those crops Expanding this farmer’s distribution to a regional level might, therefore, reduce the operation’s inputs and increase its efficiency

by allowing the farmer to work with their climate (See “Niches” under “Sales & Marketing”)

Most vegetable farmers have greenhouses - often built with NRCS costshare funds, but sometimes self-capitalized because farmers needed to build before funds became available Yet this infrastructure is primarily competitive during a crop’s shoulder season because, while yield in greenhouses is three times as high as in the field, labor costs can be six times as high; “it was 43 percent more profitable to grow in an open field—suggesting that use of tunnels will be less competitive during the peak-growing season.”13 For this reason, one producer grows cool season crops and does not want greenhouses

For grain producers, season extension is not so much about forcing off-season production (aside from buried tile line and ditches that drain moisture from fields allowing earlier access in the spring), as finding and developing varieties that are adapted to shoulder seasons This means double cropping fields with short-turnover varieties suited for early or late season, or seeding two crops at once (e.g orchard grass and clover) for dual harvests The increased income from growing late-season specialty crops like nyjer, teff, and phacelia, has been a factor in diversifying larger grain operations beyond commodity crops

Some farmers prefer to rest their fields, rather than strain their natural and capital resources by growing out of season This is is part of their sustainability philosophy

As one producer said, “resting the ground is a good idea… Folks here wear the

ground out” by not doing so

Producers try to mitigate for climate change by variety selection For example, legumes have been shattering prior to harvest due to drought, creating a need for varieties with less of a tendency to shatter early Providing food security despite climate change was a motivating factor in one producer’s decision to farm

Food Safety

Producers are uniformly in favor of food safety in concept But many find food safety rules unnecessarily cumbersome and expensive, not grounded in science nor likely to prevent food borne illness, not flexible in relation to specific growing conditions, and not scale-appropriate Many did not know the requirements of new rules, such as the Food Safety Modernization Act (FSMA), and would benefit from education like Organically Grown Company’s (OGC’s) food safety curriculum

Some are not affected by the rules because they grow low-risk crops (seed, grain, and beans), their processor bears most of the risk of contamination (dairy), or their infrastructure already satisfies the rules Affected producers view the rules as a

13 Oborne, 199.

cost of operation Producers with GAP certification state that it is not prohibitively expensive or time consuming to keep records, as long as they have good practices and record keeping already But many farmers stated that they would not become GAP certified until the government or their buyers absolutely require it, largely because of the cost of additional record keeping

Many producers, especially those using surface water, have made improvements that they hope will satisfy the rules This includes water purification systems and wells, which some farmers claim cost the same to install, but wells are generally more reliable and some producers oppose chemical treatment

Producers were concerned about how the enforcement of new rules would be funded One producer anticipated that vegetable farms would be charged an assessment for FSMA inspection Other farmers felt that they could not know about the hazards on their property until after they were fined One producer who was not GAP certified refused a hypothetical inspection because, if it found issues and an outbreak

happened later, the farm might be liable for intentional crimes, rather than simply being found negligent

One producer explained that food safety regulations are designed for large operations that can absorb additional costs and paperwork at a lower cost-per-item than small producers Producers felt that the disproportionate burden of regulations on small producers is unfair because large operations cause the majority of food borne illness outbreaks In addition, farm infrastructure differs depending on scale, making it impractical to create blanket regulations that fairly govern large and small operations alike Yet it is difficult to describe the differences between large and small operations

to decision makers and the public

One producer supported FSMA’s Tester Amendment as a way of leveling the playing field This amendment exempts some small, direct-market farms from FSMA rules This producer felt that this exemption was essential to the future of AOTM, because compliance with FSMA would make it cost-prohibitive for small farms to grow

or enter wholesale markets Many producers believed that small producers would continue to “fly under the radar” rather than spend a large percentage of their

revenue on compliance

Collectively owned and managed infrastructure could help lower the per-producer cost of FSMA-compliant food handling and storage It could also give producers greater certainty that their product is being properly stored, since some producers suspect that their purchasers’ warehousing practices contribute to the risk of a food borne illness outbreaks, for which the producer might be held liable

The youngest generation of multi-generational farms often learned by experience One producer was “just born into it;” they studied agriculture in college and it

“didn’t really cross [their] mind” to pursue a different career Another producer sold agricultural supplies and worked on an organic farm in California before returning to the family farm with the knowledge and intention to begin organic production

Most first-generation farmers, and several multi-generation farmers, learned from

“trial by fire” and earned “several Doctorates in the school of hard knocks.” They learned by reading books early in their farming career, attending conferences,

listening to other farmers, and working on profit-driven farms They also transferred skills from prior experiences as business owners and project managers to farm

management

Many felt that “the best teacher is experience.” Daily farm work is “repetitious

effort,” but it takes years to develop the skills to be an owner/operator, or even a good farmhand or equipment operator Yet many youth without a farm in the family, including some rural youth, do not have opportunities for first-hand experience, since the time spent training a novice is lost profit to producers operating on tight margins One producer acknowledged that inexperienced employees are a profit sink, but training the next generation of farmers is that producer’s act of advocacy, which

is subsidized by agritourism revenue

Producers expressed interest in classes about financing, business management, risk management, and regulatory compliance, but most have not found time for available classes unless it was necessary, e.g training to write a HACCP plan Producers

appreciate the support they receive from Extension specialists where they are funded and when the producer proactively contacts them about a particular issue, but

they sometimes rely on other professionals (e.g chemical salespersons) for advice, especially when Extension is not available One producer wanted region-specific academic resources, like soil science for Southern Oregon, and felt that Extension resources were primarily limited to high-value crops and regions

Many producers appreciated producer-focused conferences with unstructured time to learn from their peers, like Farmer-to-Farmer Exchange, EcoFarm, Organicology, and Stone Barn First-generation producers found informal mentors to be highly valuable because of their advice and access to specialized equipment But an older, rural producer felt that mentoring must be regional and happen naturally, as many farmers are independent and would be skeptical of matchmaking that is not farmer-initiated

Operations Management

Labor

All AOTM producers we interviewed retained labor; having a crew of more than a farm operator and spouse seemed necessary for them to operate at their scale Yet funding labor for growing operations can be a Catch-22, where producers cannot afford to hire new employees until their income has increased with the help of new employees By extension, it appears that farm operators must find funds to hire labor

before they have the income to pay themselves a living wage Mechanization may reduce labor costs, but is a large up-front cost and is contrary to some farmers’ social values

Regarding availability and quality of labor, producers stated, “you get what you pay for”; not surprisingly producers who pay above minimum wage and offer benefits

do not have nearly as much difficulty finding and retaining quality employees as producers who pay only minimum wage One producer with high employee retention offers “everything but dental” (including medical and 401K) to full time, year round employees Another producer’s lowest paid employees make $16 per hour, and

although they do not receive benefits, employees receive significant performance based bonuses Of this producer’s roughly forty employees, four or five have worked for the operation for over thirty years Not only are producers who pay higher wages better able to hire and retain employees, but well-paid employees do higher quality work As one producer said, “if you pay more than minimum wage, you get more than minimum effort.”

By contrast, a producer who pays their part-time employees minimum wage with no benefits has significant turnover and lackluster employee performance This producer has found it increasingly difficult to find employees as the economy has improved, and stated, “apparently they’re here because they can’t find something else,… this isn’t the most desirable job in the world.” Similarly, one producer’s only employee had just left his 50 hour per week farm position at $11 per hour for a job in town for 40 hours per week at $12 per hour Although the employee would earn less, the producer assumed that their former employee wanted to improve his lifestyle by working fewer hours

Yet one producer with low employee turnover still found it increasingly difficult to find quality replacements for employees who do leave Like many producers, many of this producer’s laborers are Hispanic This producer felt that immigration is “an issue” because “good workers are a big deal.” This producer did not advocate for citizenship per se, but would support a certificate that allows immigrants to work

Similarly, another producer with good worker retention found it difficult to find seasonal workers This producer pays seasonal workers above minimum wage, but must pay more during the summer as demand increases and producers outbid each other for limited labor pools For this reason, this producer prefers to complete off-season maintenance, such as pruning, before late spring when labor prices increase and availability decreases One producer noticed competition for labor from as far away as Wisconsin In 2014, this operation had to downsize its crop plan because

it lacked four or five workers during the high season when some employees left for more lucrative work in the Midwest And producers in remote areas with limited local housing found it difficult to find and retain employees For example, producers the Applegate Valley regretted purchasing properties far from labor pools in Grants Pass

or Medford

One producer felt that their farm had good employee retention in part because their employees are grateful to them for employing their family members who cannot find

other work, such as an employee’s son who is a convicted felon and is paying a debt

to his father through his farm wages These small-to-mid scale producers also earn employee loyalty by never asking employees to do a task that they would not do themselves This is a promise that a larger farm with a rigid management hierarchy could not deliver

Producers, especially in remote areas of Eastern Oregon, reported a shortage of skilled mechanics Larger producers paid to retain a mechanic on staff, as did one smaller producer who used specialized and modified equipment Several producers were self-trained mechanics, to greater or lesser degrees of success They reported that, as farm equipment becomes more computerized, the need to take equipment to a dealership for repairs increases, as do their maintenance costs One producer also noted that skilled large equipment operators are in short supply in the North Willamette Valley; they are not available through employee contract services and good operators are hired away quickly by other operations

Many producers viewed training new employees as an avoidable expense One

producer attributed their former bankruptcy in part to their leniency towards

inexperienced employees; as a result this producer now sees “an employee

is a paycheck.” But another producer, who has hosted over 100 WWOOFers,

acknowledged the significant time and cost required to train employees, but viewed training the next generation of farmers as advocacy, subsidized by agritourism income This producer also sees long-term financial returns from training new

employees, as the farm is currently being operated by former interns while the

producer works on expansion projects A third producer has found it hard to find local youth who can perform tasks without constant instruction or reminders This producer lamented that “common sense isn’t taught at the family level anymore.”

Several producers mentioned that a mandated $15 per hour minimum wage would

“destroy” them Some felt they could not afford to stay at their scale and pay such

a high wage In addition, one producer explained that an “ag exemption” to the minimum wage law would not help agricultural operations find and retain quality employees, because potential farmworkers would likely choose to earn $15 per hour elsewhere Another producer felt that the $15 per hour minimum wage would make Oregon agriculture less competitive with out-of-state and international producers; additional labor costs are ultimately paid by the consumer who is “already tapped out

on what they want to pay” and would not pay more for local product

Producers identified Worker’s Compensation as a major expense and expressed skepticism about how SAIF sets and uses fees For example, the year after one

producer’s life-threatening farm injury, their premium doubled The producer

assumed that SAIF would be more than reimbursed for those medical bills before the producer retired

Regulations in General

Producers’ primary complaint about regulations in general is that they are not appropriate In other words, they are designed for the largest operations, which not

scale-only have different systems and issues than small producers, but are also better able to distribute the fixed cost of these regulations over their entire operation

as overhead As a result, it is much more expensive per unit for small producers

to comply with rules that do not even account for their unique needs and risks Examples included food safety regulations, trucking requirements, specifications for processing and handling facilities, and much more

Several producers mentioned trucking regulations in general as a significant product distribution cost One producer felt that California’s transport fees and emissions regulations impeded interstate commerce and feared that similar laws would be passed in Oregon This producer also referred to an Oregon law passed in 2015 that required significant documentation, including certification of origin, for shipments

of over twenty bales of hay - another example of how regulations disproportionately burden small-scale producers Another producer felt that fuels tax reporting on trucks that are parked ten months of the year are “silly” but not overly burdensome

Conventional producers also felt burdened by pesticide regulations (see “Difficulties

of Organic Production” above)

Sales & Marketing

Many beginning producers stressed the importance of consistency to winning and retaining customers One first-generation producer said there was “nothing special” about their farm, except that they were persistent and reliable, not missing a single farmers’ market and following through on wholesale orders

Not having personal responsibility for farm finances and income seems to correlate with the absence of a comprehensive business and marketing plan For example, one beginning farmer who partners with an established farm for marketing, equipment, and recordkeeping, did not have an independent marketing plan Similarly, the manager of a farm that was funded by a non-managing owner said that not having a marketing plan was their “greatest non-cost cost.”

Similarly, several producers with guaranteed markets also do not have marketing plans An organic producer who sells hay to organic dairies, considers marketing

to be a “weak link” and does very little outreach, even after land that had lost its certification came back into organic production Yet marketing is an understandably low priority for this producer, since their hay is sold before it is grown Similarly, a pasture-raised pork producer stated that their product is rare enough that most of his customers find them By contrast, several larger producers with greater competition

in their niche meet yearly with customers to determine what and how much to grow

Direct vs Wholesale vs Commodity Markets

Most beginning farmers started with direct sales and transitioned to wholesale gradually as they grew For example, one producer sold to local groceries that

then connected them to OGC’s Ladybug Program This producer is increasing their wholesale sales because it is more efficient to sell less frequently in larger volumes;

where they once sold two cases of kale twice per week, they now sell 100 cases of kale once per week

One producer (who sold primarily to wholesale) found farmers’ markets to be

inefficient in terms of time, cost, and fuel, but another producer (who sold primarily

to direct markets) believed that direct markets are the most efficient way of

distributing food to the end user Two producers with high direct market sales said that their commitment to their community has kept them in direct markets One producer was frustrated with the requirements for packaging grain to sell at farmers markets and preferred bulk sales This producer is contracting with Hummingbird, which eliminates the producer’s need to package

One beginning farmer entered national and international commodity markets rapidly upon establishing their business because local processors did not have the capacity

to process their herbs in a timely manner and the commodity price was better than what local processors would pay Large and multi-generational operations, especially with less perishable products like grain, regularly sold to international commodity markets A producer whose family has long sold grain on commodity markets, said that the process is “ominous” for inexperienced producers, but mechanical for someone with experience This producer checks prices many times per day and has kept grain in silos for a year waiting for a good price

be worm-free and suitable for seed, which it was If this producer had guaranteed a quantity to the buyer, the producer might not have taken this ultimately lucrative gamble Grain producers make similar marketing decisions when their grain is not human grade so they sell it to animal feed markets

If the producer is raising a specialty crop with few alternative customers or the account is new, producers seem more likely to sign a contract For example, one producer grew mustard seed at a customer’s request, but without a contract The purchaser cancelled the agreement after the crop was in the ground It took the producer two years to sell the crop and, because of the difficulty, this producer no longer grows crops for specialty markets without a contract Another producer stated that contracts to purchase perishables are important because if a buyer falls through, the producer has to find another customer very quickly As Attina Diffley stated:

“For small farmers to make the leap in production and risk they need solid commitments from their buyers This is an absolute requirement and no amount

of land preservation or farmer education can negate it With a true long term

commitment from their buyer, farmers can write budgets, make the infrastructure decisions they need to grow etc., and count on the buyer to buy the product.” 14

One producer who sold exclusively to wholesale expressed dissatisfaction with

inspection protocols after the contracted product has been delivered This producer now requires “impartial USDA grading” immediately upon receipt, rather than

grading at a customer’s discretion The producer has found that graders at the plant reject or dock the grower for quality defects that do not exist or that were not present upon delivery The producer said that some processors grade potatoes only after they have stored them in poor conditions, which shows more damage than was present when the potatoes were shipped and the customer accepted them This producer said some customers are irresponsible, but some actively “spoil food to get a claim” against the farmer After a customer has done this, this producer does not do business with them again

Producers who contracted with Hummingbird Wholesale expressed great satisfaction with their detailed, in-person contract negotiation and favorable terms Hummingbird also brokers contracts between growers and other purchasers, such as Dave’s

Killer Bread One producer stated that they could sell their specialty grain directly

to the end customer, but in appreciation for past business Hummingbird has

brokered, this producer prefers to negotiate through Hummingbird; they “turn each other a good deal.” Similarly, one producer could sell all of their product to one commodity purchaser, but chooses to sell some product to Hummingbird because the compensation in their Hummingbird contract is “significant;” James Henderson maintains close communication and spends a great deal of time negotiating a

detailed sales contract, whereas this producer is not in contract at all with the

commodity firm and their representatives have never been to the farm; the producer feels like a small cog in the large mill’s wheel - they are reliable, but they do not need a farm as small as his; and this producer wants to “help out the Northwest” because “it’s fun!” This producer also sells to Charlie’s Produce, although other markets would be sufficient, because the producer sold to them when they first began and feels loyalty to them

Diversification

In deciding how and whether to diversify, a producer must consider whether the possible reduction of efficiency is outweighed by the new venture’s reduction of the business’s total risk If a producer’s demand or supply does not fluctuate significantly there is less need to mitigate that minimal risk via diversification For example, several producers grow only one product because they have few competitors and

a guaranteed market, and one vegetable producer grows relatively few varieties because consumers in their primary sales region are few in number and “not picky.” Large producers expressed an interest in diversifying into local, niche, and direct sales for “fun” and to buffer against then-hypothetical fluctuations in international markets (e.g China), but the financial benefits of diversification have not been

14 Id p 9

significant enough to cause them to invest much time or money in the effort.

Diversification is not always good business For example, one producer attempted

to expand into two high-value products, but one (turkey) was not efficient, as 40

to 50% of pullets died each year, and the second (quail) increased the operation’s overall risk because demand fluctuated too greatly for the ranch to consistently supply fresh (not frozen) birds

Niches

As mentioned above in “Season Extension,” a producer’s niche depends upon

where they sell their product Similarly, one producer sells produce through OGC to reach beyond the limited demand of their local customers who prefer to purchase inexpensive food from big box stores rather than more expensive local food This producer’s vegetables are still “local” for the purposes of OGC’s Ladybug brand, but fetch a higher price with the more distant populations that the producer could only access through a distributor

Vegetable producers with some direct-market sales felt competition from small farms that undercut larger producers in direct markets like farmers’ market and CSA They felt that some small producers do not follow labor and food safety rules and

do not make (or intend to make) a profit; they go out of business after a few years, only to be replaced by another similar farm Similarly, one small producer found it inefficient for farmers’ market vendors to grow the same items and compete with each other for prices This is one reason that this producer is forming a cooperative that can schedule crop rotation between farms

Producers also felt that industrial farms poach the niches that AOTM farmers have trailblazed One producer explained that small and AOTM producers grow market niches from popular trends to successful markets, but once the market is created, big industry starts to produce those crops and sell at a lower price As a result, the producers who started the niche watch their market erode and become less accessible

to them Examples include organic wholesale, kale, and medicinal herbs This

producer stated that the “cycles [of creating and navigating new market niches] are debilitating” and exhausting to keep up with While it is true that small and AOTM producers are “nimble enough to respond quickly to market signals relative to the largest commodity farms, which tend to be slower to change,”15 this might give an advantage to commodity farms that can wait to capitalize on the time and money AOTM producers spend on research and development

Vegetable producers also mentioned the effect that California produce has on their profitability One stated that they must not only lower the wholesale price to compete with California produce, but also the direct market price to make it equivalent to the grocery store retail price for the same items

15 Oborne, 29.

Competition from California can be both a liability and a boon One large vegetable producer sells fresh vegetables only within Oregon, not just because California prices are lower, but also because the cost of freight outside of Oregon is a “diminishing return.” This producer receives $4 to $5 less per case on shipments to California and

$2 to $3 less per case on shipments to Washington and Idaho Conversely, the cost of freight from California to Oregon gives this producer a $3 to $4 cushion per case on similar product in season While large distribution centers might decide on occasion that it is more cost effective to ship his product out of state, this producer does not search for these out-of-state price breaks or customers himself While this producer has an advantage over out-of-state producers for Oregon sales, they also feel trapped

by a small and “captive audience” and sometimes find it difficult to sell all of their product This producer treats their buyers well to ensure ongoing sales

One producer said that distribution is the hardest part of business This producer said that wholesale customers require letters of guarantee and other documents with each shipment, which can be done, but is a greater burden per unit for small producers than larger producers Another producer agreed that “distribution is the toughest thing,” not only because their small volume of product costs more to distribute than truckloads from larger farms, but also because their location is distant from regular distribution routes

Aggregation and Cooperative Agreements

Aggregation and co-marketing have the potential for reducing overhead, but “if costs

of production are high and [producers] aggregate from a bunch of smaller producers,

it may not bring down cost of production and make [them] able to compete.”16 One producer initially intended to run their poultry processing plant as a CSA for similar poultry operations, but other producers were not willing to contribute an upfront payment for the service Producers with whom this producer had discussed a joint enterprise pulled out and started their own facility, and other producers have reacted

to the price of processing by building their own facilities, despite the likelihood that this would not increase their overall profit margin However, although a joint venture for poultry processing did not materialize, this producer participates in a joint

venture for hog production because this venture saves time and is profitable

By contrast, another producer is creating a co-marketing, -production, and

-distribution cooperative that will hopefully be comprised of other small producers (many of whom this producer trained) on property the producer owns, and hopefully

at some point on land owned by a farmland trust, which the producer is also

founding This producer envisions a flexible model where producers can participate

at whatever level they choose The producer predicts that the cooperative will attract members because many producers simply want to farm and “don’t want the pony show” of managing their own distribution and marketing

16 Id, 4.

Value-Added

Smaller producers with direct markets and perishable goods, wanted to find ways

of generating revenue by processing their seconds One producer contracted with

a processor to make jam, but was not satisfied with their attention to detail or

compliance with labeling rules; in the future the producer would either find a

different processor or build a commercial kitchen and process on their own Another producer had built a commercial kitchen for this purpose, and a third producer is seeking a commercial kitchen or a partnership with a processor

One producer started a poultry processing facility because there were no USDA poultry or rabbit processors in Oregon at the time But the initial inspection process was “horrible.” Furthermore, soon after the facility opened, a state exemption for facilities that process under 20,000 birds per year was passed, obviating the need for a USDA license Another state exemption for producers processing no more than 1,000 of their own birds on site for direct sales further reduced demand for the facility This facility is now inspected under the 20,000 bird state exemption, but will not likely meet that limit Another meat producer is processing their own pork because local processors do not have the capacity to process throughout the season

As a result, the producer had had to “dump” product into the commodity market and take a loss

Farm-to-Institution

Only one producer reported selling directly to an institution This producer made one sale of winter squash to Portland Public Schools one year, but the following year PPS imposed food safety requirements that the farm could not comply with unless they made improvements that were not cost-effective, especially since no other customer required this Other small, vegetable producers were interested in farm-to-school, but one did not feel large enough to enter the market and another had not researched it

Branding and Education

One producer stated that the value of “local” branding depends upon how far a product must go to reach customers willing to paying a premium for that product grown that distance away Another producer felt “blessed that a lot of people are willing to pay more for local and organic,” but that other food purchasing options limit demand A third producer felt that advocates for regionally produced food have not done well at breaking into new demographics The producer felt that big box retailers had done well at marketing organics to consumers who would not otherwise have purchased it, but that they have not taken the next step of marketing local food

to these customers This is perhaps because retailer’s net gains from organic sales (local or not) might be higher than their net gains from local sales (organic or not) because of higher costs of distribution Producers mentioned that New Seasons has begun advertising the local brand because they are competing with farmers’ markets for customers who value the brand This producer found the That’s My Farmer

Campaign successful at marketing to a broad audience, but another producer felt

that consumer education should target customers who already have the income and inclination to purchase not only organic, but local.

Land-Based Issues

Property(ies)

Many producers found their properties through luck, family, and community: one producer partnered with a couple who owned land; another’s parents bought their property; another found the landlord of their twenty-year lease with option to

purchase through friends; another’s two low-interest rate mortgages with beneficial conditions were owner-financed by community members; another leases neighboring farmland from a woman who bought it specifically for their use; another bought their first two acres for several thousand dollars at an OSU auction; and another was the only bidder at an estate sale for their 160 acres and home, which they purchased for $7,000 (slightly above back taxes) These producers unanimously claimed they would not be farming at their current scale without their initial ‘break.’

However, this windfall of property is not always of a sufficient size to satisfy the business’s growth Several large farmers with inherited land have steadily purchased nearby parcels over the years and generations Yet for farmland expansion to make financial sense, the farm business must be poised to efficiently incorporate that new acreage into their system; they must line up sufficient labor, equipment, and new markets for this increase in acreage to actually increase their operation’s profitability

Smaller and newer producers experienced severe growing pains when they took on second mortgages One producer, who originally farmed on twenty mortgaged acres, eventually leased an additional ten acres for several years When this producer’s landlord terminated the lease, the producer decided not to scale down to their

pre-lease size, and not to find another equivalent lease, but rather to expand the operation by purchasing twenty farmable acres from an adjacent neighbor The seller leveraged the producer’s interest to sell the property for three times its fair market value, a cost the producer incorrectly assumed would have been recovered by now through increased property values The producer did not experience a direct, linear correlation between size and profitability; profit decreased with expansion because labor costs increased more than the producer’s gross This producer said that their most profitable year was actually when they scaled down to twenty acres the year after losing the lease To scale back production, the producer “cut out” their least profitable accounts and crops As a result, their gross and labor costs remained the same, but other costs decreased, creating a greater net return than when they farmed thirty acres The producer said they could not have remained at that size because their crop rotations demand more acreage, but they learned that bigger is not

necessarily more efficient unless the farm plan also becomes more efficient

Producers cautioned against buying or leasing land that is too distant from their other parcels, equipment storage, or home This is because equipment may be

damaged during transit; transporting workers increases labor and fuel costs; and the consequences are magnified for mistakes like failing to turn off irrigation or

bring a specific tool Yet ideal parcels are hard to find, as producers reported that land is extremely scarce (especially in the Willamette Valley) and the price bubble makes farmland especially unaffordable for new farmers without outside capital (see

“Financial Considerations”) Established producers often know the seller personally and negotiate a sale before the land goes on the market This insider information is difficult to acquire for producers who are not already established in the community

Lease or Own

Each option has its pros and cons, and many interviewees farmed a combination of both owned and leased, private and public land Leases are beneficial in that lessees avoid some debt and taxes and can write off their lease payments as a business expense, while landlords generally pay for large improvements One producer would prefer leasing from a trust that makes farmland available to future generations, and another prefers leasing to owning as a way to involve community members

in the operation and avoid debt A third producer acknowledged that leasing may

be wise for beginning producers who can invest limited capital in equipment and other improvements instead of a mortgage, but warned that lessees who invest significantly in soil health cannot take this improvement with them when the lease is terminated and are not compensated for soil improvements unless the lease provides for compensation

Land ownership is beneficial in that it provides certainty of continued operation (especially for perennial growers), avoids personality issues and unrealistic demands

of a landlord, allows the owner to retain the benefits of their improvements, increases the owner’s equity and consequentially their borrowing power, and fosters pride of ownership, especially for multi-generational operations Because producers have strong, emotional ties to their land, one producer felt that they are more likely to use environmentally sound practices if they own their farmland Another felt that, if farmers from California and investors from around the country and world recognize Oregon farmland as a good investment, Oregon farmers should take advantage of this investment opportunity themselves In fact, the market value of Oregon farmland increased 5.52% faster than the S & P 500 between 1964 and 2012.17 Eric Henny of

NW FCS noted that out-of-state investors were most attracted to land with value, perennial plantings, like orchards

high-Although no interviewees had first-hand knowledge of farmland investment models that lease to farmers, such as Farmland LP, their opinions of these models were mixed One producer saw great benefit in private investors divesting their money from the stock market and investing it in farmland, making leased land more

affordable and accessible to beginning farmers But other producers felt that “if a farmer doesn’t control the land or market, they’re just serfs.” As one producer stated:

“Not being able to build equity is almost crazy… If you can’t utilize the equity

in an operation to leverage opportunity, then you’re at a severe disadvantage That’s not just in land, that’s in all your assets If you can’t monetize it, then you’re in trouble.”

17 Richmond, Henry, and Timothy Houchen “Farm Zoning and Fairness in Oregon: 164 - 2014.” Portland, Oregon: American Land Institute, 2015 p 2, Table 6, p 31

Another producer felt that, if an objective of these models is to help beginning farmers become established, farmers would be better served if they owned their business and land and learned by taking the risks to grow.

Conservation Easements

Almost all producers either had not heard of working lands easements or did not understand how they functioned to preserve farmland and generate liquid assets for the landowner(s) Several producers mistakenly believed that their property was “too small” for a working lands easement One producer had suggested putting a working lands easement on a property he was negotiating to purchase in order to reduce the fair market value, but the sellers felt that the concept was too “outside the box” to explore

Several producers with some knowledge of easements felt that “forever is too long” and did not want to limit their options or the options of the next generation to subdivide a portion of the land to generate income or build a family home However, one producer would consider creating an easement at the time of sale, if it is

beneficial for succession planning

Several producers had sold or applied to sell temporary conservation easements, such

as enrolling in the NRCS Wetlands Reserve Program And the only producer who had sold a working lands easement greatly appreciated the experience and benefits of the easement, but now disapproved of all “subsidies.”

Infrastructure

Most producers built or converted existing buildings piece-by-piece as their

operations grew One producer built structures as needed and converted buildings from personal use (e.g garages) to business use as necessary Using old and/or

existing structures has the benefits of lowering the cost of construction and allowing the farm business to design their facilities to be multi-purpose or easily modified However, that producer reported that repairs accumulate for old buildings, and that reliance on existing structures might stunt the continued growth of the business For example, the producer’s seed warehouse, which was built in the 1960s, is now too small for the operation and requires expensive repairs However, it would cost millions of dollars to replace it As a result, the producer must contract with third parties to clean their grain at a much greater cost than if the producer cleaned it themselves Several producers who recently built new facilities regretted having built them too small to meet their current needs; they had not accounted for their medium-term growth rate in the facility design

Producers also accumulated and modified equipment gradually as they could afford it and as their operation had the labor, land, and markets to accommodate the changes

to production that the new equipment would cause As one producer stated,“profit

on a small scale requires mechanization.” For example, the relatively expensive purchase of a simple wheelhoe greatly increased one beginning producer’s efficiency And an herb producer stated that a piece of specialized equipment would “pay for

itself in the first month.” However, to afford it, the producer would need up-front capital, which they do not have, or a loan This producer can qualify for financing for new equipment, but has found it very difficult to find financing for equipment that is used or modified because its value as collateral has been impaired Not only

is it harder to finance, but used equipment might become a net cost to the business

if it requires frequent repairs (especially during a critical production period) and the operator must often hire a mechanic

New or used, producers sometimes struggle in learning how to incorporate new types of equipment into their operation One producer purchased a pivot to reduce their time spent irrigating hay However, this producer spent long, hard hours

removing trees and rocks from the half-pivot’s path and yet still the pivot caught

on stumps three times during its first season, requiring repairs that were financially

“devastating” to the operation A beginning operation experienced “huge growth spurts” as a result of new acquisitions of equipment, but their equipment purchases have not always been wise in retrospect For example, they bought a tractor

that became too small for their operation after just three years To make better

equipment-purchasing decisions, they frequently seek counsel from experienced farmers, and have also acquired much of their specialized equipment from these farmers

One major infrastructure need across all product categories is proper equipment for post-harvest handling The need for this category of infrastructure was also identified

by Gorge Grown Food Network18 and Ecotrust’s gap analysis.19 As one may imagine, most producers’ storage infrastructure is far inferior to a wholesaler’s storage

facilities For example, one producer’s cold storage can only reduce the temperature

of their potatoes to 38° F, whereas OCG can reduce product loss by storing potatoes

at the optimal temperature of 34° F And one of this producer’s storage buildings keeps potatoes in piles that can easily become contaminated with rot if damaged potatoes make it through the processing line

Although most farmers built their infrastructure over time, one operation’s

infrastructure was financed by its owner, allowing its farm manager to start large and expand rapidly This farm manager said that if a producer has infrastructure

in place, they can handle incremental increases, provided they have labor Many producers expressed that their operation could grow significantly if they just had one piece of equipment A small producer’s sales are limited by the size of their delivery truck; another’s small water pump limits irrigation; and the number of crops one producer can harvest is limited by their number of combines

Several producers were interested in co-investing with similar producers for shared infrastructure For example, an optic sorter would sort one producer’s potatoes more efficiently and accurately than workers, thereby reducing both labor costs and product loss due to rotten potatoes entering storage And another producer would like to use an optic sorter to clean beans and grains However, an optic sorter is too expensive for either of these larger operations to afford on their own, especially if

18 Sullivan, Sarah “Feeding the Gorge Community Conversations: Growing Gorge Farms.” January 8, 2015.

19 Oborne, 200.

they cannot supply it with consistent throughput One producer would like to form

a grower cooperative similar to one in Klamath County, where several producers invested in an optic sorter for their shared use However, this producer does not have

a critical mass of producers in his sparsely-populated region for such an investment; the producer estimates that they would need to partner with at least four other organic fresh potato growers, but the closest such grower is 150 miles away

Another producer gave examples of successful equipment shares for root diggers, seed cleaners, and other equipment that is mobile or does not require frequent use This producer felt that younger producers were more likely to participate in such a venture, and believed that producers would pay for such a service, perhaps making the rental of limited-use farm equipment a viable for-profit business niche

Water

Producers reported that the cost of water rights is often the bulk of the total price of land for lease or sale, and many purchased particular properties specifically for their senior water rights Availability of water also limits the producer’s volume of sales and products raised, thereby affecting their net profits For example, to stay within the limits of his water rights, one producer does not speculate on the market and raise more vegetables than they have a guaranteed market for As the producer said,

“if you can’t harvest or sell [your product], you’re just wasting water.” Similarly, the types of crops another producer grows are limited by the size and certainty of their water rights If this producer had more water, they would switch from growing alfalfa and forage crops to growing higher value human food, like squash, and potential value-added products like popcorn and dried beans Similarly, if one rancher had more water, they would grow more of their own animal feed, thereby reducing their costs

Many producers have had some of their water rights “called” (or temporarily

suspended) over the years because of a lack of supply In the same vein, the level

of one producer’s well dropped in August of 2014, causing them to reduce their plantings No producer could recall a time when they had lost all access to water, however, when producers were interviewed during Oregon’s record-hot July, many worried that this would be the year that their rights would be called while crops requiring irrigation were still in the ground Several producers stated that if their rights were cut off significantly, they might decide to contest neighboring users’ improper use Water right enforcement is a complaint-based system, but in common practice, water users do not report their neighbor’s improper use so as to avoid interpersonal conflict

Many producers with surface water rights are switching to groundwater because of reduced costs, compliance with anticipated food safety regulations, and increased water conservation One producer and their landlord are sharing the costs of drilling

a well as part of a state program to trade instream rights for groundwater rights The landowner had to forfeit their senior priority date for a priority date at the time of transfer, but the producer felt the trade-off was worth it, as the surface water source

“was a sewer” and the producer needed to pump three times as much water from it as

from the well A well is a cost savings for this producer, but electricity for a ground water pump is a significant expense for producers east of the Cascades with deep aquifers For example, an eastern Washington producer estimated that the cost of applying surface water is one-fourth the cost of applying ground water

Some irrigation districts, especially in eastern Oregon and Washington, have

initiated water conservation and storage projects that producers have found quite useful For example, an eastern Oregon producer participates in their district’s

groundwater recharge project, which pumps 7,000 to 8,000 acre feet of water from streams into their aquifer between October and January when instream water is plentiful Operating a water pump for this project is an expense for this operation, but this producer reasons that it would cost more for district members to contribute

to the construction of a storage facility to accomplish the same result Other water conservation measures include converting open irrigation ditches into buried

pipelines, and cost-shares for water efficient irrigation systems, which may also reduce the operation’s electricity costs and create opportunities for more efficient fertilizer application via fertigation

Financial Issues

Costs

Not surprisingly, labor was all producers’ primary cost, accounting for approximately 50% of many producers’ costs The highest proportion of labor costs were 63.5% and 66%, but a small producer who reported the lowest relative labor costs had taken out their first line of credit this year to afford labor to help with the extra work created

by new infrastructure, i.e a pivot with frequent breakdowns

After labor, fertilizer, chemicals, mortgages and leases, equipment purchases and repairs, capital expenses, and fuel were also significant Another significant cost category that has increased over the past few years in proportion to total costs is seed and animal feed, depending on the enterprise One producer’s feed costs had doubled three years ago and prices have been slow to lower; this producer is still paying

133 - 150% of the former price of feed Several producers attributed the increase in this cost category to reduced competition among seed and feed suppliers because of recent consolidation All animal producers interviewed supplied at least some of their feed and wanted to supply more For example, the largest producer provided all of their own feed except grain and concentrate and would like to purchase more land to raise additional feed Another rancher would irrigate their hay to have more than one cut per year if they had a larger water right

Electricity for ground water pumps was a high cost for producers in arid areas

with low water tables For instance, electricity for a water pump costs an eastern Washington producer $3,000 per month and was an eastern Oregon producer’s greatest cost